Low natural gas prices, not wind energy, primarily responsible for coal’s troubles

As we’ve observed previously, a common tactic when an energy source is facing market headwinds is to blame wind energy for its problems.

Just as some nuclear power plant owners previously tried to blame wind energy for their market struggles, some in the coal industry are now attempting to say wind is responsible for their challenges. Just as the previous attacks were debunked and dismissed as a “distraction,” the latest attacks on wind distract from the main market-driven challenges facing those industries.

The reality is that wind has a minimal impact on the economics of other power plants, particularly relative to low natural gas prices and stagnant electricity demand. This is because wind energy rarely sets the market price paid to all generators. Moreover, any impacts wind projects have on competing energy sources are due to market-based outcomes (i.e. wind energy’s lower costs) that occur with or without the renewable Production Tax Credit. Other sources of energy with a low fuel cost, like coal, nuclear, and hydropower, have the same impact on market prices.

The market-driven impact of wind on electricity prices is beneficial for consumers. In fact, utilities, large corporations, and others are buying wind energy precisely because it allows them to diversify their energy portfolio with a low-cost, stably priced source of energy.

Some of the clearest evidence that wind is not the main factor driving other energy sources’ market woes can be seen just by looking at where coal and nuclear power plants are retiring. Most retiring nuclear plants are in areas that have little to no wind generation, like Florida, Vermont, Wisconsin, Massachusetts, and New Jersey.

Similarly, the following maps show that the vast majority of coal power plant retirements (top map) have occurred in the eastern US, where there is relatively little wind generation (bottom map). At the same time, the wind-heavy interior region of the U.S. has seen few coal retirements, even though coal provides a larger share of the electricity mix in that area.

Rather, the primary factor driving coal power plant retirements appears to be that new shale gas production in the Marcellus region and other parts of the Eastern U.S. has undercut coal power plants operating on relatively high cost Appalachian coal.

Fossil, not wind, sets electricity market prices

Wind energy almost never sets the price received by other power plants in the electricity market, while fossil fuel power plants almost always do.

The following chart, which students of economics will recognize as the typical shape of the supply curve in any market, explains why. Power plants are listed in order of increasing operating cost, and grid operators move up the supply curve to meet electricity demand at any point in time, ensuring the lowest-cost resources available are used. Because they have no fuel cost, wind plants and other renewable resources are on the far left side of the curve, followed by nuclear, then coal, then gas, and finally oil-fired power plants. As indicated by the vertical lines, electricity demand almost always falls in the range where coal or gas power plants are the last ones needed to meet demand, and therefore the cost of operating those plants sets the market clearing price. In contrast, the wind plants on the far left side of the curve almost never set the electricity market price.

Data from grid operators confirm this is true. In the MISO (MidContinent Independent System Operator)  grid operating area, natural gas power plants set electricity prices 76 percent of the time, coal power plants 23 percent, and wind plants only 1 percent of the time (page A-6).

Data for the PJM grid operating area (page 133) show that lower natural gas prices have accounted for 68 percent of the decline in power prices since 2008, low coal prices 28 percent, and dropping oil prices 3 percent of the decline. In contrast, wind setting the electricity market price only accounts for 0.2 percent, or 1/500th, of the electricity price decline over that time.

Because fossil fuel resources set the market clearing price, low natural gas prices and subsidies for fossil fuels are directly factored into electricity market prices. In contrast, tax credits for wind energy are not incorporated into electricity market prices because wind plants almost never set the market clearing price. Therefore, a wind plant has the same impact on electricity market prices regardless of whether or not it receives the Production Tax Credit. This impact is essentially zero, as wind almost never sets the clearing price paid to all generators.

Negative prices are rare, and typically not caused by wind

Occasionally transmission constraints force a wind plant to reduce its output, as there is not enough transmission capacity for the full output to reach customers. When this occurs power prices can go low or negative on the isolated section of the power grid between the wind plant and the transmission constraint.

However, because most wind capacity is located in remote areas, there are typically no other power plants on this section of the grid, so there is little to no impact on other power plants. Fortunately, long-needed upgrades to the transmission system have greatly reduced these localized occurrences of negative prices, and further upgrades will minimize them even further (the chart on page 41 shows the downward trend of wind curtailment, which is a close proxy for trends in localized occurrences of negative prices).

Regarding recent complaints from the coal industry in North Dakota, data from the MISO grid operator confirm that wind almost never sets the electricity market price in North Dakota, with only 0.27% of prices in the range that would be set by a wind plant. In almost all hours, the electricity market prices received by North Dakota’s coal power plants are set across the 15-state MISO market footprint. With 175,000 megawatts (MW) of generation competing to determine market prices and fossil power plants almost always setting the market clearing price, North Dakota’s 2,746 MW of wind capacity, or even the total MISO wind fleet, have little impact on electricity market prices in North Dakota.

The trend in North Dakota electricity generation, shown below, confirms that in-state wind generation has a small impact on in-state coal generation in this broader market. North Dakota coal generation has remained steady while wind generation has increased to meet demand for exports and growing in-state electricity consumption, indicated by the black line.

It should also be noted that other energy sources are a leading cause of negative prices on larger sections of the grid. Data from the PJM grid operator show that wind generation is not the largest driver of negative prices at nuclear power plants in Illinois. More recent data from the Quad Cities nuclear plant in Illinois continue to show that most negative price events happened during time periods of low wind output, while most periods of high wind output do not correspond to negative price events.

From mid-2015 through mid-2016, PJM wind generation averaged only 1,845 MW during negative price events, compared to a maximum wind output of 5,021 MW and an average output of 1,681 MW across all hours. The primary factor causing negative prices at those nuclear plants still appears to be the inability of nuclear plants to reduce their output during periods of low electricity demand.

Low natural gas prices have also caused a new phenomenon that is leading coal power plants to cause negative prices. At least some coal plants have decided to continue operating at a loss as power prices go low or even negative to avoid paying contract penalties for not taking enough coal under long-term supply and delivery contracts with mines and railroads. For many coal power plants that no longer have space to add to their record coal piles, these contracts have created an out-of-market incentive to continue operating and drive power prices negative simply to burn coal to avoid contract penalties.

Data that was inadvertently publicly disclosed as part of the Peabody Coal bankruptcy further confirms that these inflexible long-term coal contracts are common; for a specific power plant in New Mexico, “The 19-year coal supply contract, originally signed in late 2005, calls for delivery of 3.7 million tons to 4.3 million tons of coal annually between 2010 and 2024, with smaller amounts provided in preceding years. The contract includes a provision that allows Peabody to collect a ‘shortfall’ payment of $7.35 per ton if the plant owners do not take the minimum contracted tonnage.”

The owner of a typical coal power plant would subtract around $8/MWh from its electricity market offers to account for the cost of that contract penalty. In addition, the large and ongoing subsidies for fossil fuels and nuclear generation also have a significant impact on electricity market prices, as discussed in the final section below.

Wind’s impact on prices is market-driven and beneficial for consumers

Wind does benefit consumers by reducing the cost of producing electricity and allowing electricity demand to be met by more efficient power plants. This market-driven impact of wind on electricity prices is beneficial for consumers, and occurs for any source of energy with a low fuel cost, such as nuclear, coal, or hydropower. In fact, utilities, corporations, and others are buying wind energy precisely because it allows them to diversify their energy portfolio with a low-cost, stably priced source of energy.

While at times wind has significantly reduced electricity prices through this market-driven phenomenon, that impact is quite small at current gas prices. Returning to a supply curve chart similar to the one introduced above, the supply curve for a power system is shown below under 2008 and 2015 fuel prices. While in 2008 natural gas power plants were significantly more expensive than coal power plants, at today’s low gas prices many natural gas power plants can operate at a cost that is comparable to the operating cost for most coal power plants. As a result, today’s supply curve is much flatter.

The slope of the supply curve determines the impact of wind on the market price. The impact of wind is to push the supply curve to the right as wind output is added to the left side of the supply curve. In 2008, adding wind energy did have a significant impact on electricity market prices by allowing electricity demand to be met using cheaper coal plants rather than more expensive natural gas power plants. For example, moving left on the supply curve from 70 GW to 65 GW of demand from conventional power plants because of the availability of 5 GW of wind energy would have reduced power prices by $35/MWh in 2008, but at today’s low gas prices that 5 GW of wind only reduces market prices by around $0.70/MWh.

Stepping back, one can also see that fossil fuel prices have a much larger impact on electricity market prices. 70 GW of demand in 2008 would have corresponded to a market price of $64/MWh, but under 2015 fossil fuel prices the electricity price is only $27/MWh, based solely on the price of natural gas. In this example, low natural gas prices have a 50 times larger impact on the electricity market price than the full impact of wind. 5 GW of wind output is quite high, roughly comparable to the average wind output in one of the U.S. electricity markets with the most wind, like MISO, Texas, or the Southwest Power Pool.

Wind accounts for less than three percent of federal energy incentives

Subsidies for fossil energy have a far larger impact on electricity prices than incentives for wind energy. Fossil fuels account for 65 percent of total federal energy subsidies, versus less than 3 percent for wind energy. Moreover, because fossil resources almost always set electricity market clearing prices, subsidies for fossil fuel production and use are directly factored into electricity market prices, unlike wind incentives.


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